Author Information : Ravi Dharwadkar (Whitman School of Management, Syracuse University)
Pamela Brandes (Whitman School of Management, Syracuse University)
Maria Goranova (Lubar School of Management, University of Wisconsin-Milwaukee)
Year of Publication : Strategic Management Journal (2010)
Summary of Findings : The results suggest that when more institutional owners overlap in their ownership of both the acquiring and target firms, the acquiring firms are more likely to experience decreased shareholder value in merger and acquisition (M&A) deals, an effect that can be constrained by stronger board control.
Research Questions : What is the impact on shareholder value of the acquiring firm in mergers and acquisitions, if owners have a stake in both the acquiring and target firm?
What we know : Mergers and acquisitions (M&A) research indicates that shareholders in acquiring firms endure significant losses and shareholders of target firms enjoy significant gains. However, M&A research assumes that the owners of the target and acquired firms are independent. Due to the steady growth of institutional ownership, that is no longer the case in many instances. Many institutional owners are on both sides of the deal and therefore concerned with overall shareholder gains in terms of both the acquirer and the target, while owners who are only on one side of the deal (i.e., in the acquiring firm) are likely to incur greater losses. Shareholders and boards need to be cognizant of this problem.
Novel Findings : Of the 2,688 M&A deals with publicly traded companies as both acquirers and targets during 1998-2004, 1,122 deals had overlapping institutional owners. In these deals, on average, there were 44 overlapping owners who held approximately 19 percent of the acquiring firm’s outstanding shares. As more owners overlapped in their ownership of both the acquiring and target firms, the acquiring firms experienced decreased shareholder value. Smaller boards with greater proportion of independent outside directors and separating the roles of the CEO and chairperson of the board constrained losses.
Implications for Practice : Boards need to explicitly consider the level of overlapping institutional ownership in M&A deals.
Smaller boards, more independent boards and boards with separate roles for the CEO and chairperson of the boards can be more effective in these circumstances.
Implications on Research: Both firm-level and portfolio-level ownership concerns need to be considered simultaneously in order to better understand the implications of ownership for firm outcomes.
Full Citations : Ravi Dharwadkar and Pamela Brandes, “Owners on both sides of the deal: mergers and acquisitions and overlapping institutional ownership” (with Goranova, M.), Strategic Management Journal, 2010.
Abstract : Using a corporate governance lens, this study considers owners with a stake in both the acquiring and the target firms in the context of mergers and acquisitions. A possible agency problem arises with regard to monitoring implications as managers may be able to take advantage of compromised monitoring because overlapping owners may focus on the aggregate value for both the acquiring and the target firms and nonoverlapping owners may be interested only in the acquirer's side of the deal. The results suggest that when more owners overlap in their ownership of both the acquiring and target firms, the acquiring firms are more likely to experience decreased shareholder value through merger and acquisition deals. This effect, however, can be constrained by stronger board control.